From Time Magazine:

Innovative ways to manage medical expenses are gaining popularity, with health savings accounts (HSAs) leading the way. Americans have saved $104 billion in HSAs by the end of 2022, and this figure is expected to reach $149.7 billion by 2025. This article explains how HSAs work and if they’re a good fit for you.

An HSA is a tax-advantaged account that combines the benefits of a savings account with the flexibility of using tax-free funds for qualified medical expenses. It’s available to those enrolled in high-deductible health plans, Medicare recipients, or those not claimed as dependents. Contributions can be made via payroll deductions or independently, and funds can be invested.

You can use your HSA for various qualified medical expenses, including alcoholism/substance abuse treatment, prescription drugs, and travel/transportation for medical care. It can be used to pay for medical expenses incurred through a preferred provider organization (PPO) if the PPO is HSA-eligible. Earnings in an HSA grow tax-free, and funds can be rolled over from year to year.

Comparatively, a flexible spending account (FSA) is similar to an HSA but is owned by employers and subject to “use it or lose it” rules. The contribution limits for HSAs are higher than those for FSAs, and HSA funds can be invested, unlike FSA funds. Individuals aged 55 and older can make additional catch-up contributions to their HSAs.

An HSA allows you to save pre-tax income and withdraw it tax-free for qualified medical expenses. You can contribute to it via payroll deductions or independently. Unspent funds roll over from year to year, and you can withdraw money at any time. An HSA card allows you to pay for qualified healthcare expenses with a debit card.

An HSA distribution is a withdrawal of funds from your HSA account. Distributions used for eligible medical expenses are tax-free. You can reimburse yourself for qualified medical expenses that were paid out of pocket by using your HSA. HSA distributions will be reported to the IRS, and you may be subject to income tax and penalties for non-qualified medical expense distributions.

The triple tax advantages of HSAs, the ability to use it for spouses and dependents, portability if you change jobs or retire, and the option to invest funds are significant pros. On the other hand, cons include the requirement to be enrolled in an HDHP and the exposure to investment risks when funds are invested.



Read more: What Is a Health Savings Account?